Trend Reversal Patterns

The very important point in trading is your understanding of the moment when
the tendency has become weak and is going to reverse. The reversal signal
will be the breakout of the trend line. You need to understand if this
signal is true and what a target price will be after the breakout. The
reversal price formations can answer this question.

The reversal pattern is the price movement signalizing the tendency has
become weak and is going to change its direction. Usually the reversal
patterns appear at the maximums or minimums of the price chart. We know some
reversal patterns and their properties.

Let us start studying the reversal patterns with a double bottom and a
double top. These formations appear at the strong levels when the price
chart reaches them, cannot break out after two attempts and then reverse.

As we see on the picture both formations look like usual and upturned letter
“W”. Using this formation you can start trading after the price breaks out
of the resistance line at the double bottom or the support line at the
double top. After breakout of these strong lines you can expect the movement
distance equal to the biggest formation height. Usually tops or bottoms of
the formations are at the same level but sometimes there may be exceptions
to the rule.

The other reversal patterns are a triple top and a triple bottom. These
formations have the same principles as the double top and bottom.

As in the case of the double tops and bottoms a trading signal appears after
the breakout of their strong levels. The price will move the distance equal
to the biggest part of the formation.

The next formation indicating the tendency reversal is head & shoulders. The
head & shoulders formation reminds a man shrugging his shoulders. This
formation is one of the strongest reversal signals and very popular among
the traders. The head & shoulders formation tells that the bullish tendency
is changing into the bearish one.

The model is formed of tops with different size and the middle top is the
highest one. It is a head. The formation has minimum two shoulders but
sometimes can have more shoulders on both sides. The line connecting
minimums A and B is called as a neckline and is the base-line. We usually
see an ascending neckline on the uptrend and a descending neckline on the
downtrend. After its breakout the price can reverse to point C to confirm
the neckline. When the neckline is confirmed we can consider that a price
pattern has been formed. After breakout the price generally moves a distance
equal to the head height. You can open a deal at the breakout point or point
C. The upturned head & shoulders formation tells that the bearish tendency
has changed to the bullish tendency. It works on the same but mirroring
principles.

The rarest reversal formation is a diamond (rhomb) price pattern. It looks
like two triangles connected at their bases. This rare formation is a strong
reversal signal.

After breakout the price chart moves in the direction opposite to a price
movement at entry of the diamond formation.

The price target is usually the same as the formation height or the distance
which price moved to reach the diamond pattern. As this price pattern is
rare its appearance on the chart will be strongly pronounced and easy to
identify.

As we see on the picture, after the breakout of the diamond formation the
descending tendency changed into the ascending tendency. So the work with
the technical analysis patterns is mostly subjective as the trader decides
for himself what a price formation he sees. With gaining an experience the
trader will filter the formations which are not the price chart patterns. We
recommend to fresh traders not to search price patterns where they do not
appear. The more salient the price formation is the more chances the price
will move as expected.